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All Forum Posts by: Dow Yang

Dow Yang has started 2 posts and replied 3 times.

Let's say for instance, I'm looking to buy a duplex that is $200k, I can either use a FHA loan 3.5% down or use a conventional loan with 20% down. Wouldn't a FHA loan over the course of 1 year save me more money? In this scenario, the duplex would be used as a rental - live in one side and rent the other.

Here's why I think the FHA loan would be better:

FHA Down Payment = $7,000 (.035 * 7,000)

Conventional Down Payment = $40,000 (.2 * 200,000)

PMI on the FHA would be around $150 a month, but we'll make it $300 to be extra safe here. (The amount for mortgage every month doesn't really since someone else would be paying the mortgage)

$300 * 12 = $3,600 PMI a year.

After one year in FHA you would refinance the house - by not having enough equity in the house yet, you would still pay for PMI but it drops off after 78% by refinancing it into a conventional loan. Let's say closing costs are $8,000 for the refinance - being extra safe here.

Assuming I've got a decent deal on a house, I'd have to help pay $300 to cover mortgage on the house. Adding the PMI above which is $300 a month, makes it $600 a month I'd have to help pay for. ($600/month is cheaper than most apartments/houses around here, so I'd still be saving money overall compared to renting out another place to live in)

Over the course of the year and the refinancing closing costs I would’ve paid:

$7,000 Down Payment

$3,600 PMI over one year

$8,000 Refinance closing cost

Total of: $18,600 over the one year

$40,000 - $18,600 = $21,400

I would’ve saved $21,400 in this one year time frame.

After the one year and the refinance has gone though, I would move out and rent out the other side. This would then cover everything and give some profit. I know the PMI would kill the profits on the duplex for the time being, but after the loan reaches 78% LTV the PMI drops off and then the profits would be higher.

There is more paperwork this way, and much more of a hassle, but considering you save $21,400 the extra time spent on filling out paperwork, going to the banks, etc is well worth it.

Most people recommend buying rental properties with a conventional loan, but how I'm thinking about it, it seems like a conventional loan is just a waste of money. Why save $40,000 to down payment a rental when it would only cost $18,600 to FHA then refinance the loan?

If the way I'm thinking makes sense, then wouldn't repeatedly taking out FHA loans year after year to get 2,3,4 plexes super cheap a great idea? (I would have to move every year to live in the new place, but that doesn't really matter to me)

Overall, It would take less money to get into the market, and the rental income covers everything for me. 

Am I missing something here that a FHA requires that would make this not a smart thing to do?

@Jeff Brower @Derek Tellier

I'm just a recent grad still living with my parents for free since i don't need to pay rent. But i'm interested in getting started in the investing scene and was trying to analyze this deal and essentially see if it was worth to move out. 

Only paying 276 for rent would be very nice if i do move out though, so i cant really complain there. 

I'm assuming that the posts/blogs where people say they end up making money is because they have a really good deal on a MFH then?

I recently got interested in real estate investing, so I've been roaming around bigger pockets. I've noticed that a lot of people talk about FHA 3.5% down payments on multifamily homes living in one side and renting out the other side as a start to real estate investing.

I've been doing some research and calculations on a few MFHs and I always end up being negative, therefore I'd have to help pay for a part of mortgage/fees since the person I'd be renting too isn't paying enough rent to cover everything. Here is an example of my calculations. 
House costs = $170,000DownPayment=$5,950 (.035*170,000)Interest rate = 5% (30years)
Property taxes = $149.67 ($1,796/yr)

Mortgage = $880.66 ($10,567.87/yr)

Maintenance = $141.67 ($1,700/yr)

Insurance = $104.17 ($1,250/yr)

Vacancy = $125 ($1,500/yr)

Property manager =$125 ($1,500/yr)

Monthly rent = $1,250 ($15,000/yr)

Total expenses = $1,526.17

Total Income = $1,250

Net = -$276.17

I used 10% of the income for both property manager and vacancy just to be safe. If I was to actually buy the MFH i would do the repairs by myself, so i wouldn't need a property manager, but i left it in the calculations just to see what would happen if I included it, I would still be negative even if I excluded it. Maintenance at 1% of the house value (not sure about this amount...) Insurance at $1,250/yr as a guesstimate... The tenant would pay for all utilities. I used an online calculator to do the calculations for me.

So I guess my question is, how are people making money/coming out on top from FHA 3.5% down? Are they just getting super good deals? Am I doing my calculations wrong? Am I over estimating certain expenses?